An influential citizen wants to get away with tax evasion, a risky practice that can trigger audits resulting in sanctions. To reduce the chances of being audited, he can invest in the complexity of his evasion scheme —which we call "brains". The probability that an audit results in a sanction depends on the effort exerted by an investigator. To reduce the effort that she exerts, the citizen can commit to delivering punishments —which we call "muscles". We show that there exists a threshold in the quality of institutions below which muscles and brains are complements and above which they are substitutes. The citizen's equilibrium strategies yield a testable prediction: estimates of offshore tax evasion display an inverted U-shape along the quality of institutions. We provide evidence of this finding by building a panel dataset of estimated offshore wealth by individuals for 37 countries between 2002 to 2016.
{"title":"Brains or Muscles? A Political Economy of Tax Evasion","authors":"A. Tomasi, A. Parmigiani","doi":"10.2139/ssrn.3861982","DOIUrl":"https://doi.org/10.2139/ssrn.3861982","url":null,"abstract":"An influential citizen wants to get away with tax evasion, a risky practice that can trigger audits resulting in sanctions. To reduce the chances of being audited, he can invest in the complexity of his evasion scheme —which we call \"brains\". The probability that an audit results in a sanction depends on the effort exerted by an investigator. To reduce the effort that she exerts, the citizen can commit to delivering punishments —which we call \"muscles\". We show that there exists a threshold in the quality of institutions below which muscles and brains are complements and above which they are substitutes. The citizen's equilibrium strategies yield a testable prediction: estimates of offshore tax evasion display an inverted U-shape along the quality of institutions. We provide evidence of this finding by building a panel dataset of estimated offshore wealth by individuals for 37 countries between 2002 to 2016.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124825993","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward‐sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high‐frequency interest rate changes around FOMC announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous‐beliefs model in which one of the agents is wrong about consumption growth.This article is protected by copyright. All rights reserved
{"title":"Interest Rate Skewness and Biased Beliefs","authors":"Mikhail Chernov, M. Bauer","doi":"10.3386/w28954","DOIUrl":"https://doi.org/10.3386/w28954","url":null,"abstract":"Conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward‐sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high‐frequency interest rate changes around FOMC announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous‐beliefs model in which one of the agents is wrong about consumption growth.This article is protected by copyright. All rights reserved","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126183594","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we provide the first cross-country empirical evidence on the relationship between economic policy uncertainty (EPU) and banks’ interest income activities (measured using the net interest income). Using bank-level panel data of 3,252 banks in 16 economies over the period 2009-2018, we show that EPU has a negative and statistically significant effect on banks’ net interest income (NII). Specifically, we find that banks’ NII decreases as the level of EPU increases. We also show that this reduction is due to the reduction in other interest income which is only partially offset by the reduction in other interest expense. Finally, our results show that the reduction in banks' net interest income (associated with an increase in EPU) is stronger for banks located in countries where negative interest rates are in place.
{"title":"Economic Policy Uncertainty and Banks' Interest Income: Empirical Evidence from an International Panel Dataset","authors":"Whelsy Boungou, Charles Mawusi","doi":"10.2139/ssrn.3875005","DOIUrl":"https://doi.org/10.2139/ssrn.3875005","url":null,"abstract":"In this paper, we provide the first cross-country empirical evidence on the relationship between economic policy uncertainty (EPU) and banks’ interest income activities (measured using the net interest income). Using bank-level panel data of 3,252 banks in 16 economies over the period 2009-2018, we show that EPU has a negative and statistically significant effect on banks’ net interest income (NII). Specifically, we find that banks’ NII decreases as the level of EPU increases. We also show that this reduction is due to the reduction in other interest income which is only partially offset by the reduction in other interest expense. Finally, our results show that the reduction in banks' net interest income (associated with an increase in EPU) is stronger for banks located in countries where negative interest rates are in place.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123032591","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The ongoing economic crisis caused by the COVID-19 pandemic has generated important proposals for addressing countries’ financial distress in the short to medium term. However, it has also made even more apparent the existing gaps in the global financial architecture writ large and highlighted the extent to which key actors pay closest attention to this infrastructure in situations of crisis. By then, of course, it is already too late.
This essay argues that the international community should use the energy generated in the current context to move toward ‘disaggregated sovereign bankruptcy’—which can be understood as a framework by which multiple processes at varying levels simultaneously support or instantiate a shared set of sovereign debt resolution principles and commitments. Such an approach moves beyond overly simplistic and binary framings of market-based versus statutory options, and instead conceives of improvements in the contractual realm, in the multilateral arena, and at the level of domestic legislation as complementary rather than competitive. The essay also clarifies that the explicit embrace of a more disaggregated framework for implementing debt resolution principles need not be disorganized. It argues in favor of establishing an international body purpose-built to recommend, coordinate, and facilitate steady, incremental progress in the architecture for dealing with sovereign debt across multiple vectors. Advocates of more rational debt restructuring should take steps now to adopt an infrastructure that would make future debt crises less severe and perhaps less likely—even when the spotlights are directed elsewhere.
{"title":"The Time Has Come for Disaggregated Sovereign Bankruptcy","authors":"Odette Lienau","doi":"10.2139/ssrn.3836955","DOIUrl":"https://doi.org/10.2139/ssrn.3836955","url":null,"abstract":"The ongoing economic crisis caused by the COVID-19 pandemic has generated important proposals for addressing countries’ financial distress in the short to medium term. However, it has also made even more apparent the existing gaps in the global financial architecture writ large and highlighted the extent to which key actors pay closest attention to this infrastructure in situations of crisis. By then, of course, it is already too late.<br><br>This essay argues that the international community should use the energy generated in the current context to move toward ‘disaggregated sovereign bankruptcy’—which can be understood as a framework by which multiple processes at varying levels simultaneously support or instantiate a shared set of sovereign debt resolution principles and commitments. Such an approach moves beyond overly simplistic and binary framings of market-based versus statutory options, and instead conceives of improvements in the contractual realm, in the multilateral arena, and at the level of domestic legislation as complementary rather than competitive. The essay also clarifies that the explicit embrace of a more disaggregated framework for implementing debt resolution principles need not be disorganized. It argues in favor of establishing an international body purpose-built to recommend, coordinate, and facilitate steady, incremental progress in the architecture for dealing with sovereign debt across multiple vectors. Advocates of more rational debt restructuring should take steps now to adopt an infrastructure that would make future debt crises less severe and perhaps less likely—even when the spotlights are directed elsewhere.<br>","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"91 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124676388","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-05-30DOI: 10.22904/SJE.2021.34.2.004
Sungjin Cho, Jan R. Kim
Adverse demographics in Korea impinges on its growth potential and fiscal outlook. Accordingly, this study examines the current demographic situation and recent projections related to the impacts of population aging in Korea, particularly on the looming fiscal imbalance. The focal conclusion is that a two-way effect exists from population aging. First is the anticipated stress placed on government finances due to increasing welfare expenditure for the elderly. Second is sluggish economic growth and thus the inability to collect sufficient government revenues. The prospect of large and growing deficits is therefore immediate and potentially long lasting as governments will be faced with rising spending demands and sluggish tax revenues arising simultaneously from an aging population.
{"title":"Population Aging in Korea: Implications for Fiscal Sustainability","authors":"Sungjin Cho, Jan R. Kim","doi":"10.22904/SJE.2021.34.2.004","DOIUrl":"https://doi.org/10.22904/SJE.2021.34.2.004","url":null,"abstract":"Adverse demographics in Korea impinges on its growth potential and fiscal outlook. Accordingly, this study examines the current demographic situation and recent projections related to the impacts of population aging in Korea, particularly on the looming fiscal imbalance. The focal conclusion is that a two-way effect exists from population aging. First is the anticipated stress placed on government finances due to increasing welfare expenditure for the elderly. Second is sluggish economic growth and thus the inability to collect sufficient government revenues. The prospect of large and growing deficits is therefore immediate and potentially long lasting as governments will be faced with rising spending demands and sluggish tax revenues arising simultaneously from an aging population.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117211782","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
As markets become more electronic and inevitably faster, we see the increasing importance of efficient methods for pricing and risk. This paper introduces analytical deltas for general interest rate swaps.
{"title":"Analytical Deltas for Interest Rate Swaps","authors":"Adriano Queiroz de Mesquita","doi":"10.2139/ssrn.3854835","DOIUrl":"https://doi.org/10.2139/ssrn.3854835","url":null,"abstract":"As markets become more electronic and inevitably faster, we see the increasing importance of efficient methods for pricing and risk. This paper introduces analytical deltas for general interest rate swaps.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114472281","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past. Note: Downloadable document is in Italian.
{"title":"Italia 1 Trim 2021: Pil, Debito & Co (Italy 1Q 2021: GDP, Debt & Co.)","authors":"Maurizio Mazziero, A. Lawford, Gabriele Serafini","doi":"10.2139/ssrn.3854389","DOIUrl":"https://doi.org/10.2139/ssrn.3854389","url":null,"abstract":"Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. <br>English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.<br>Note: Downloadable document is in Italian.<br>","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125703650","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We implement a recently established approach to investigate interest rate risk of banks with extensive engagement in maturity transformation. Therefore, we contribute to the emerging literature contradicting modern banking theory's view on interest rate risk as inevitable consequence of banks' maturity mismatch. We find evidence for an alignment of banks' interest income and expense sensitivities which might indicate an implied interest rate risk hedge by their business model. Banks with lower expense sensitivities show significantly higher loan maturities and higher loan proportions in their balance sheets. However, we also confirm a remaining exposure to changing market rates. Our results shed light on an implicit hedging mechanism within the traditional business model of banks, its (in)completeness, and consequences for adequate regulation.
{"title":"Mind the Income Gap - Partial Hedging of Interest Rate Risk within Banks' Business Model","authors":"D. Platte, Fabian Wening","doi":"10.2139/ssrn.3905888","DOIUrl":"https://doi.org/10.2139/ssrn.3905888","url":null,"abstract":"We implement a recently established approach to investigate interest rate risk of banks with extensive engagement in maturity transformation. Therefore, we contribute to the emerging literature contradicting modern banking theory's view on interest rate risk as inevitable consequence of banks' maturity mismatch. We find evidence for an alignment of banks' interest income and expense sensitivities which might indicate an implied interest rate risk hedge by their business model. Banks with lower expense sensitivities show significantly higher loan maturities and higher loan proportions in their balance sheets. However, we also confirm a remaining exposure to changing market rates. Our results shed light on an implicit hedging mechanism within the traditional business model of banks, its (in)completeness, and consequences for adequate regulation.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131927385","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Regulated small-dollar installment lenders do not operate within Arkansas, but they do in all six bordering states. We can measure the effects of Arkansas' 17 percent interest rate cap because Arkansas residents obtain installment loans only from out-state lenders. On average, Arkansas residents borrow $1,051 at an APR of 93 percent, when incorporating travel costs. Perimeter county residents hold 96.8 percent of out-state supplied small-dollar installment loans and interior county residents hold 3.2 percent. Robustness checks show that nonprime borrowers in the interior counties have less access to all sources of credit than do prime borrowers in the perimeter counties.
{"title":"Measuring the Consequences of a Binding Interest Rate Cap on Small-Dollar Installment Loans","authors":"Thomas W. Miller, O. Lukongo","doi":"10.2139/ssrn.3899419","DOIUrl":"https://doi.org/10.2139/ssrn.3899419","url":null,"abstract":"Regulated small-dollar installment lenders do not operate within Arkansas, but they do in all six bordering states. We can measure the effects of Arkansas' 17 percent interest rate cap because Arkansas residents obtain installment loans only from out-state lenders. On average, Arkansas residents borrow $1,051 at an APR of 93 percent, when incorporating travel costs. Perimeter county residents hold 96.8 percent of out-state supplied small-dollar installment loans and interior county residents hold 3.2 percent. Robustness checks show that nonprime borrowers in the interior counties have less access to all sources of credit than do prime borrowers in the perimeter counties.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117242625","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.
{"title":"Marginal Tax Changes with Risky Investment","authors":"P. Macnamara, Myroslav Pidkuyko, Raffaele Rossi","doi":"10.2139/ssrn.3840072","DOIUrl":"https://doi.org/10.2139/ssrn.3840072","url":null,"abstract":"Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top.","PeriodicalId":119398,"journal":{"name":"Political Economy - Development: Fiscal & Monetary Policy eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116068512","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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